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Dreadful expansion outlook for beverage chains across nation

Social distancing and compulsory lockdowns are throwing a wrench in beverage chains’ market expansion plans this year adding insult to injury for these already unhealthy firms.

dreadful expansion outlook for beverage chains across nation

Local coffee chains are struggling to keep their stores alive amid the crisis, with expansion plans stagnating too

 

 

Under the impacts of the ongoing health crisis, beverage giants like Trung Nguyen and Starbucks have been negotiating with landlords to cut leasing costs that make up the majority of their expenditures.

Starbucks Vietnam has been in talks with property owners for months after foreseeing more hardships in business during the outbreak. However, not all owners have agreed to drop prices.

“As society is in shared trouble, I think they should do something to support lessees. We appreciate the landlords’ quick feedback and agreement with our proposal to reduce leasing expenses in the next few months,” a Starbucks Vietnam representative told VIR.

Hampering expansion

In the last two months, revenues and profits of beverage chains have plunged due to being closed during the pandemic, and Starbucks is not alone in its struggle.

The Coffee House, a fast-growing startup, debuted in Ho Chi Minh City in 2014 before reaching 40 shops after only two years. Today, the figure stands at 250 units. In 2018, founder and CEO Nguyen Hai Ninh revealed the target to open as many as 700 outlets across Vietnam in the next five years, at an average of 10 new stores each month.

In late 2019, Vo Duy Phu, marketing director of The Coffee House, shared with local media that 2020 would be a milestone for its expansion after careful preparations in recent years. According to the plan, The Coffee House was set to open an additional 100 shops across the country in 2020.

Meanwhile, Highlands Coffee, a Vietnamese brand with nearly 300 stores as of last December, is a nationwide leader in the middle- and high-end coffee retail segment.

Although there has been no specific information about its expansion plans for 2020, past experience shows that the brand can grow in quick fashion. In 2018 alone, 80 new Highlands Coffee facilities were opened. It is unlikely that the chain will ignore any opportunities that arise in the market in the near future.

However, COVID-19 is now surely hurting the plans of both The Coffee House and Highlands Coffee.

E-Coffee, owned by Trung Nguyen Group, targeted to expand its network to 3,000 units this year to become the largest café chain in Vietnam. To realise this ambition, Trung Nguyen issued an incentive package that charges no initial franchising fee for coffee shops of 4-40 square metres and setup cost of VND65-175 million ($2,800-7,600), including interior decor, furniture, training, and so on. However, it currently only operates approximately 127 shops, equalling 4.2 per cent of the plan.

Some coffee staples have been forced to shut down altogether. Terra Coffee & Tea was one such chain, closing its doors and handing back leased land. A representative from the coffee chain refused to admit that the move was due to the pandemic, only confirming that dropping revenue and falling customer volumes were to blame.

In another case, Tranquil Book & Coffee as well as Cu Xa Ca Phe chains were forced to announce that they will have to temporarily close shops until the health crisis is under control.

Back at Starbucks Vietnam, the representative emphasised the negative impacts of COVID-19 on its business performance, adding that despite increased online sales, the move cannot fully cover the group’s traditional trading channels.

Last straw

The prolonged health crisis is driving beverage chains like Starbucks and Trung Nguyen to desperation. As a result, along with expansion plans, maintaining performance has also been a great burden for them during this time.

Trung Nguyen has been slowing down for half a decade now. By the end of 2018, its pre-tax profit dropped 50 per cent on-year to VND347 billion ($15 million). In comparison with 2016, the pre-tax profit in 2017 also fell by 11 per cent to VND681 billion ($29.6 million).

Moreover, the revenue of its subsidiary Trung Nguyen Franchising – the operator of E-Coffee and Trung Nguyen Legend – has been far worse than the competition. According to Trung Nguyen Group’s latest financial report, its coffee chain in 2018 earned VND350 billion ($15.2 million) in revenue, down 3 per cent on-year. Its losses also surged from VND8 billion ($347,830) in 2017 to VND24 billion ($1.04 million) in 2018.

Despite being present in Vietnam for seven years, Starbucks only operates 49 stores in the country, while the numbers in Thailand, Indonesia, and Malaysia are 330, 320, and 190, respectively.

According to data published by market research company VIRAC, in 2018, Starbucks Vietnam saw about VND593 billion ($25.8 million) in revenue, equalling 36 per cent of Highlands Coffee’s earnings of VND1.628 trillion ($70.8 million) in the same year. Turnover was even inferior to that of The Coffee House, which earned VND669 billion ($29 billion).

Solutions to overcome

Amidst the pandemic, maintaining operations to offset expenditure for premises and employees is a huge challenge, even in terms of preserving the number of chains after the emergency is over.

Hence, beverage chains are negotiating with hosts of premises to reduce fees. The Coffee House is a prime example, with monthly expenditure for leasing premises sitting at VND100 million ($4,350) per store, with a system of nearly 160 shops across the country.

Vo Duy Phu of The Coffee House, said “The coronavirus has delayed our plans to expand by an additional 100 shops this year. After the Lunar New Year, we were to open more shops but have been forced to adjust plans until after May at least.”

Trung Nguyen has proposed its proprietors to lower the lease by 20-50 per cent and extend the payment timeline. However, similar to Starbucks, several of them were unwilling to help. Facing the tough situation, the company will review business results to decide whether to liquidate contracts or halt the renewal of expired contracts.

Responding to VIR, the representative of Starbucks Vietnam said that the company has no concrete plans to expand the number of stores but has a long-term business strategy for each of its current stores. “For now, we will only say that we are doing well in comparison with our business plan in the country,” the representative insisted. VIR

Kim Anh

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